The Size of the Photo Licensing Market

Tuesday, July 17, 2007

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Just how big is the photo licensing market? Why do we need to know?

Simply put, there is money to be made. It's why one asks how much oil is
in a particular well. Or how much gold is in a particular mine. Whenever
there's a commodity to harvest, there's an economic balance between the
investment and the potential yield. Furthermore, one also needs to examine
trends -- whether the market size is growing or shrinking -- as this
governs per-unit pricing; the more of it there is and the deeper the
well, the lower the price will be.

As with oil, gold and any other commodity, the secret to financial success
is answering these questions accurately. And accuracy depends on
methodologies.

What makes the stock photo industry so interesting is that, unlike every
other media type that's licensed or sold, photography is the only one
that has the fewest economists that follow it. (In fact, there are none.)
What's more, those in the business of buying and selling stock photography
use antiquated, legacy models to track actual revenues. As the main thrust
of this article will address, the fact that everyone in this industry uses
the wrong methods for assessing the stock industry means that there's a
Gordian Knot waiting to be undone. The one who does it will be king.

To illustrate the basic premise, consider that most industry analysts
measure the total size of the stock industry as the total aggregate
sales of all the known stock photo agencies, plus some statistical
sampling of the independent stock market (small specialized agencies
and such). Add it up, and you get about $2 Billion. (This figure has
been constant since 1999-2000.)

In other words, whatever the "industry" believes is an accurate
number, the players within that industry behave consistently with that
assumption, thereby perpetuating current trends. That is, if market
prices for stock photography is trending downward, and no one regards
the industry any differently than before, then no actions will be taken
to change course. So, the trend will continue.

In order to make smart business decisions, one needs to use plausible
and sound methodologies in analysis so as to make better predictions for
more important and interesting things, like: What photo trends are making
more money? What business segments are thriving, and which aren't?
Where should marketing dollars be spent, and where to pull back?
Should investments be made in social networks that harvest user-generated
content? Are market prices really affected by microstock agencies? What
kind of income should photographers expect to earn? What role do consumers
play in both the supply and demand of stock photography?

With the exception of discussion of microstock agencies, none of the
other questions above are ever asked or considered in photo-industry
press, blogs, or online discussion forums.

Asymmetric Information
One fundamental problem with how traditional "old-school" analysis that only
looks at aggregate sales of major stock agencies, is that it doesn't take
into account the elephant in the middle of the room: the internet. In one
respect, this isn't surprising. Up to 2000, most stock sales were from
agencies and media companies, largely because digital cameras were hardly
capable of producing sufficient size or quality, and because consumers
weren't contributing content to user-oriented sites (like photo-sharing).
So, it was actually accurate to measure the industry from these traditional
sources.

But today, with trillions of images online (and growing), and photo
ranking and crowd-sourcing acting as "great editors in the sky",
photo buyers have long learned that traditional agencies aren't the
only suppliers. Yet, industry analysts still haven't revised their
methodologies for measuring the market. Even junior economists in high
school know that a viable sampling of buyers and sellers need to
be more representative of the population at large, not just formal
stock photo agencies.

In fact, this is what Joseph E. Stiglitz proved when he won the Nobel
Prize for economics. He, along with George Akerlof of the University of
California, Berkeley and Michael Spence of Stanford University came up
their analysis of markets using "asymmetric information." This is a method
by which accurate information about your target subject can be more
accurately measured by looking at other, tangential information that
may appear to be unrelated at first glance, but still has a measurable
impact on that target subject of research. In other words, information
that appears to be "asymmetric" is often an indicator that there's
other data that can bring these disparate points into symmetry.

The example that Stiglitz used is one that measured the total cost
of the Iraq War. He and Linda Bilmes, a budget expert at Harvard,
[analyzed the economic impact|https://www.danheller.com/images/FAQ/Business/JES_paper.pdf]
by looking at a statement from Congressional Budget Office (CBO)
that estimates the total cost of the Iraq war to be $500B. This includes
the money paid to soldiers, the cost of weapons, and so on. The kind of
stuff most people think about when they go to war.
What the economists found was that this number doesn't include a
trove other related "asymmetric information," such as the cost of
treating severely wounded veterans. At the time of his writing, this
included roughly 16,000 people, 20% of whom had serious brain and head
injuries. The cost of lifetime disability and healthcare the government
will have to pay for years to come are not calculated into the CBO's
$500B figure. Using known data on the cost of treating people with these
conditions over the course of their life expectancy, Stiglitz estimates
that the government will spend between $500B and $800B.

The fact that this figure is not calculated into the CBO's "total cost"
is what makes it _asymetric._

And there's more asymmetric information: the fact that we don't have
that money in the treasury now means that we have to raise the money
through taxes. But until those taxes are collected, the government
has to use "borrowed money" (in the form of treasury bonds), and the
interest that bond holders receive is paid by the government using--you
guessed it--tax dollars. So, again, the costs of caring for the soldiers
continues to rise, this time through interest payments. In fact, that
$500-800B health care bill requires borrowing money that will cost
another $100B to $350B in interest payments over the course of time.

This analysis goes on and on with other "asymmetric information." In the
end, Stieglitz estimates that the true cost of the war ranges between
$1.2 to $2 trillion. Yes, that's a 'T'.

And that brings us squarely back to the photo industry and the size of
the licensing market. We can use asymmetric information to help paint a
more realistic picture of what the true size of the photo industry is.

Holes in the Data
One thing people think about when they consider the size of the photo
market is how many pro photographers there are. If you ask ten photo
agencies how many photographers they represent, and you add them all up,
you may get a sense of how many pros are represented by them. But, if
you ask a market research firm that talks to photographers, they'll tell
you that most pros submit their images to about 6-7 different agencies,
on average. Here, we have a case where the market research firm knows
more than the others. This is what Stiglitz calls "imperfect information",
which is necessary to understand that the holes in the data are there. Now
it's a question of finding them all and adjusting numbers to bring us
closer to a true picture of the industry.

One way to test how many pros there are would be to do random sampling
of buyers to see where they actually acquired their images, rather than
to ask agencies what their sales are..

Interestingly, non-photo industry trade associations (such as advertising
research groups) have asked such questions. As far back as 2000, there's
been a pretty consistent statistic that most buyers get their images
from photographers themselves, not agencies. Advertising Age had published
statistics supporting this consistently since 2000 showing that 35%
of photos were purchased from stock agencies. Yet, most people
still look at the annual revenues by Getty and the other major
agencies as indicators of the total aggregate size of the industry as a
whole: $2B. Clearly, the market is far bigger than $2B. In
all the analysis I've seen, there is no evidence that researchers have
collected "asymmetric information" about these independent photographers
simply because these shooters aren't mentioned--only agency data is.
(In private research done for a client, current estimates are that 80%
of licensed images are done on a peer-to-peer basis between photo buyers
and photographers.)

So, how does one measure the size of the stock photo industry from this
asymmetric information? Or rather, what information is missing so we
can bring symmetry back in line? Well, first of all, keep in mind
that what we want to know is not (necessarily) the size of the photo
market, just yet. We want to start with the methodologies of
surveying. Like Stiglitz, we don't expect to come up with a firm number,
but a range of plausible values, depending on the various qualities of
the data we gather.

Data's Building Blocks
Analysis must start with an understanding of the most basic, fundamental
building blocks of any market: the raw materials. For the photo industry,
that's the camera itself. To that, I cite a recent announcement by Canon
that they are building a $450M plant that will make nothing but CMOS
sensors for its digital cameras. This year alone, canon will sell 28M
cameras, 3M of which are sold to pros.

This presents two points to consider:

Three million pro photographers? That's already a lot more than what
most "industry analysis" has ever shown, and far more than can be
accounted for by stock photo agencies, photo trade association
memberships, and magazine subscriptions, to name a few. So, who are these
pros that Canon knows about that no one else does? This is asymmetric
information, and we need to explain it (probably by other data) to bring
that information back into symmetry with known data.

Some have suggested the missing pros that Canon knows about could be
wedding, portrait and staff photographers. Fair, but that assumption
is also that such photographers don't traditionally contribute to the
stock industry. That assumption may not necessarily be true.
Examining data gathered by the industry groups that represent those
photographers, we learn that about 10% of their own revenue is now
derived from stock sales. And, that number is rising. The data also
shows that these photographers are selling direct to buyers, not
through agencies.

This is the kind of missing information that helps bring data back into
parity. Putting it together, 10% of three million is 300,000 photographers.
We know that the total number of microstock members isn't nearly that
many, so we can deduce that the "industry analysis" isn't taking their
contribution of stock sales into account when calculating the total size
of the market.

Now let's assume each of these "pros" makes ONLY $1000 a year
in stock photo sales. 300,000 photographers (that use Canon cameras)
at $1000 each for a year, that's $300M that isn't really being accounted
for in "traditional" industry surveys. So far, this puts their error
off by 15%.

And that's only Canon cameras. What about Nikon? What about all the
others? The total number of cameras of 8mps and higher is closer to 100M
from all the manufacturers combined. Since we're likely to find a similar
distribution of pros and consumers among them, and even assuming the
conservative (but conveniently round) estimate that 10% of the buyers of
those cameras earn a meager $1000 in a year from licensing, that suggests
that 10M people will earn an aggregate of $10B from photo licensing.

Before you start thinking this is way out of line, pay attention
to stories in the New York Times, USA Today, and other daily newspapers
and magazines that tell stories about stay-at-home moms who are running
photo businesses shooting everything from their kids to their vacations,
and selling them online for extra income. The number of such stories is
increasing at rates faster than ever seen before, as can be found using
search features on the websites of major news periodicals. The cameras are
clearly being sold, the stories about these home-businesses are emerging
faster than ever, the vast accumulation of photos on the web is growing
at astronomical rates. Is it "really" far-fetched to believe that 10%
of camera owners may realize $1000 in one year from licensing?

But wait, there's more asymmetrical data.

So far, we've only counted the cameras that are sold to "pros." What
about the other 90% that were sold to consumers? Just because they are not
pros doesn't mean they don't contribute to the total size of the market
somehow. To be as plausible as possible, let's be very conservative in
our numbers: if only 10% of consumers earn $100 a year (yes, a measly
$100--likely one or two low-ball inadvertent sales), that equates to
90M people (at $100 each) yielding $9B.

Consider that consumers sell stuff on Ebay; in 2006, Ebay had revenues
of $6.35B. That's just Ebay's fees from the sales exchanged by
consumers. Estimates of how much money exchanges hands between people
on Ebay range from $100B to $500B. And that's between people buying and
selling stuff like used toothbrushes. So, is it so far-fetched to believe
that your next door neighbor got a check for $100 from a magazine or
hotel for their vacation photo in Hawaii?

$10B from pros unaccounted for in surveys? $9B from consumers? The numbers
are starting to add up. What other asymmetric information is out there
for us to consider that isn't likely calculated by current research by
the photo industry? How about:

Money collected from copyright violations

Sales of photos
as "art" through licensing agreements

Money paid by companies
to their own staff, customers or clients for photos or photo-related
responsibilities, which is normally a "stock" style transaction

Independent self-representing photographer/agencies like myself

There is enough anecdotal evidence to show that each of these categories
by themselves have signs of growth that have exceeded everyone's prior
expectations. The mere existence of the billions of photos on the net,
which grows daily, imply that they are finding their way to uses that
have resulted in some sort of exchange of money. All of these are
simple examples that collectively amount to enormous sums that are
not included in the total estimate of the "size of the photo market"
by anyone doing surveys.

Market Opportunity
What do we do with this information? First and foremost, it confirms
that opportunity exists for companies to capitalize on the fact that
there is currently no organized mechanism by which the common consumer
can participate. Microstocks may think they provide a sales channel
for consumers, but they are really just getting photographers from
larger agencies (who sign up with as many agencies as they can). One
can measure the attraction of consumers to microstock agencies by
seeing how poorly ranked such sites are in search engines for common
photography subjects and keywords, and by the poor ranking they have
in traffic metrics on sites like alexa.com and compete.com.

The perpetuation of misinformation of the size of the market and who
the buyers are by stock agencies and traditional analysts explain why
Getty and Corbis continue to see revenues drop, quarter over quarter,
and also have no strategy for countering downward trends of stock
license fees. They continue to erroneously focus their sole marketing
efforts towards traditional media buyers, and also continue to ignore
the rapidly growing photo-sharing social networks as potential vehicles
for attracting both buyers and sellers of stock photography.

In short, there is no photo-equivalent of Ebay to help realize the
potential of the non-traditional stock photo buyer and seller. As long
as people don't believe it exists, the market trends will continue on
their present course. Indeed, no one expected Ebay to succeed at what
it does, or that Google would succeed at tiny text ads distributed on
other people's pages, or that FedEx would ever succeed in making a
business out of overnight delivery. Unless someone actually does
it, it's easy for everyone else to say, "it can't be done."

The Boost from Latent Demand
Despite the fact that no King Arthur will emerge to pull the sword out
of the stone anytime soon, it doesn't mean it won't happen some day. And
when it does, this very fact will itself cause another inflation of the
market due to latent demand. Let me explain:

When people ask me what I think the total size of the photo licensing
market is, I say it's probably around $20-25B, which represents
real, recognized revenue generated by people that current industry data
doesn't take into account. Yet, the potential size is 20x larger
than that, once an Ebay-type entity emerges. What happens is that
a public swell of interest causes more and more people to jump on the
bandwagon, just as people jumped on Ebay. This is a phenomenon called
"latent demand." It's another term used in economics to describe human
behavior once the perception of opportunity emerges. Examples include:

Lottery ticket sales skyrocket once the value of the jackpot
exceeds a certain psychological barrier.

People invest more in the
stock market when common news headlines show that it's reached all-time
highs.

People will drive more on highways when a carpool
lane opens up, because the perception is that the new lane will relieve
congestion, thereby removing the very disincentive they had for driving
in the first place.

The phenomenon of latent demand is so powerful that it is precisely the
unexpected wildcard that throws off data projections in any industry. In
fact, this is precisely why Ebay became the phenomenon that it did.

Here's another way that latent demand could emerge: in a previous post,
I suggested that Google could radically change the photo licensing market
by simply making it possible to find all instances of a given photo on
the net, thereby making it nearly impossible to "steal" images without at
least being exposed to a financial liability. This, in itself, would fuel
the rate of licensing to levels never anticipated. This could actually be
the catalyst that proves the existence of the larger market, which will
in turn provide the impetus for an Ebay-like company to emerge. Market
forces have a tendency to coalesce and organize a more controlled and
competitive market once opportunity appears less risky.

(NOTE: This article was written in 2007, and Google came out with their
image-recognition search in 2009. Furthermore, Picscout announced a
similar engine and infringement search technology in 2009 as well.)